Repsol Obtains Improved Credit Rating Ahead Of Time

Standard & Poor’s has announced an upward revision in its long-term credit rating for Repsol from BBB- to BBB. It has also improved its short-term rating from A-3 to A-2, with both ratings assigned a stable outlook. S&P had already improved its outlook for the Spanish oil major from “stable” to “positive” in July, leaving the door open for a ratings upgrade.

The improvement is based on the continual reduction in the company’s net debt over the last 18 months, added to solid cash generation. The ratings agency flags that the “stable” outlook it has assigned reflects its view that Repsol will continue to be cautious in its investments and dividend payments, in line with market conditions. With this decision, S&P has now put its credit rating for Repsol on the same level as Fitch and Moody’s.

The news has come before it was actually expected (in February 2018, with the annual results presentation) and responds to the significant improvement in Repsol’s credit metrics. Renta 4 analysts point out that already in Q3’17 the company’s net debt was over 7 billion euros (its target for the whole year). With an estimated EBITDA for 2017 of 6.5 billion euros, this would mean closing the year with a Net Debt/EBITDA ratio of 1x-1,1x. This is compatible with S&P’s improved rating to BBB. Furthermore, this rating upgrade could translate into improved shareholder remuneration. Renta 4 says:

This would probably be more in the form of a share buyback to offest the dilutive effect (total or partial) of the scrip, rather than eliminating the scrip. We don’t rule out an increase in the DPS more in the medium-term, although we believe this is not a priority. The current DPS (0,80 euros/share, dividend yield of 5%) is already amongst the first quartile of the Ibex and sector peers. It’s likely that an improvement in the dividend would be more linked to the company not having identified any opportunities for investing in the business. We could have more information on this when Repsol updates its strategic plan once it has met its targets.

Aside from slashing capex, debt reduction has been achieved through significant cost reduction/synergies delivery, a disposal program that is now largely complete, and shareholder distribution cuts. Repsol has also benefited from very favorable Downstream conditions leveraged through a high quality manufacturing portfolio.

Considering a barrel at $60, UBS estimated price target for 2018 is set at EV/DACF of 5.5x , in line with historical levels for the sector mid-cap group, adjusted for higher capital productivity.